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### Viewing cable 06QUITO2138, A THOUSAND CHARIOTS IN THE FIELDS: CHINESE PLAYERS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06QUITO2138 | 2006-08-25 12:31 | 2011-06-26 00:00 | CONFIDENTIAL | Embassy Quito
Appears in these articles: http://www.mcclatchydc.com/2011/05/16/114269/wikileaks-cables-show-oil-a-major.html

`

    VZCZCXYZ0004
    OO RUEHWEB

    DE RUEHQT #2138/01 2371231
    ZNY CCCCC ZZH
    O 251231Z AUG 06
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 5104
    INFO RUEHBJ/AMEMBASSY BEIJING 0173
    RUEHBO/AMEMBASSY BOGOTA 5904
    RUEHBR/AMEMBASSY BRASILIA 3639
    RUEHBU/AMEMBASSY BUENOS AIRES 0683
    RUEHCV/AMEMBASSY CARACAS 1956
    RUEHLP/AMEMBASSY LA PAZ AUG LIMA 0893
    RUEHME/AMEMBASSY MEXICO 1503
    RUEHNE/AMEMBASSY NEW DELHI 0041
    RUEHSG/AMEMBASSY SANTIAGO 3001
    RUEHGL/AMCONSUL GUAYAQUIL 1023
    RUCPDOC/DEPT OF COMMERCE WASHDC
    RHEHNSC/NSC WASHDC 2202
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    C O N F I D E N T I A L QUITO 002138

    SIPDIS

    SIPDIS

    TREASURY FOR SGOOCH, NSC FOR DTOMLINSON

    E.O. 12958: DECL: 08/24/2016
    TAGS: ECON EPET PINR PREL ETRD EC CN
    SUBJECT: A THOUSAND CHARIOTS IN THE FIELDS: CHINESE PLAYERS
    IN ECUADOR'S OIL INDUSTRY

    REF: A. A) 05 QUITO 2152

         ¶B. B) QUITO 1231
         ¶C. C) INR REPORT 06/10/2005

    Classified By: EconOff Josh M. Cartin for reasons 1.4(b) and (d)

    ¶1. (C) Summary: With their $1.4 billion acquisition of
    Canadian EnCana, China's state oil companies announced their
    entrance as major players in Ecuador's and the region's
    petroleum industry.  Now with active participation in at
    least five of Ecuador's petroleum blocks, and with further
    investments in the offing, Quito is playing host to a steady
    inflow of managerial, financial and technical representatives
    of China's major and minor oil companies.  Their efforts and
    activities in Ecuador are both less coordinated and less
    harmonious than they may appear.  End summary.

    "The Heavy and the Swift..."
    -----------

    ¶2. (C) The overseas arms of three major Chinese oil
    conglomerates, the China National Petroleum Company (CNPC),
    the China Petroleum Company (Sinopec) and Sinochem all are
    present and have ongoing operations in Ecuador.  (Note: the
    fourth major Chinese oil conglomerate, the China National
    Overseas Oil Company (CNOOC), has concentrated its efforts on
    offshore drilling and does not operate in Ecuador).  These
    companies own, invest in or operate individual assets in
    Ecuador, and in some cases work together through consortia.
    CNPC, for example, through its international arm, the China
    National Overseas Development Corporation (CNODC), operates
    CNPC International (Amazon), which solely possesses the
    concession to drill in Ecuador's Block 11.  CNPC and Sinopec
    also are the 60-40 joint-investors in Andes Petroleum, the
    Ecuadorian operating entity that purchased the Ecuadorian
    assets of Canadian EnCana earlier this year (reftel a) and
    which is now the majority concessionaire for Blocks 14, 17,
    Tarapoa and Shiripuno.  As part of the EnCana acquisitions,
    Andes purchased the former's 36% stake in the Oleoducto de
    Crudos Pesados (OCP) pipeline consortium and its 40% stake in
    the disputed Block 15, formerly run by Occidental Petroleum
    (Oxy).  Andes' $1.4 billion purchase agreement with EnCana
    contained an indemnity clause specifying a refund of up to
    20% of the total purchase price if the Oxy asset was seized
    by the Ecuadorian government.  EnCana's ex-General Manager in
    Ecuador told EconOff that the companies currently "are
    working toward that".

    ¶3. (C) Sinochem, as its name implies, has its historical
    roots in chemical production, trading and sales, and,
    according to its local manager in Ecuador, is known in China
    as a fertilizer monopoly.  Its integrated petroleum arm was
    established in 2002, In Ecuador Sinochem is a 15% joint
    investor-operator, together with Taiwan's Offshore Petroleum
    Investment Corp. (OPIC), of Block 16, of which Spanish Repsol
    is the majority shareholder.  Sinochem's senior
    representative in Ecuador XXXXXXXXXXXX (protect) told EconOff
    that in Ecuador most of Sinochem's activities are in
    petroleum trading.

    ¶4. (C) Sinopec Services, a wholly-owned subsidiary of
    Sinopec, has a relatively large operation in Ecuador and
    contracts technical services such as equipment leasing,
    seismic studies and oilfield construction to the petroleum
    exploration companies in Ecuador.  Sinopec Services has
    performed work for American companies such as Oxy. Several
    Ecuadorian engineers from state-owned Petroproduccion have
    traveled to China recently to participate in the analysis of
    seismic studies performed by Sinopec Services.

    ¶5. (C) EconOff has also met representatives from at least
    three other Chinese petroleum companies: Changqing Petroleum
    Exploration Bureau (CPEB), nominally under the control of
    CNPC, and Zhongyuan Petroleum Exploration Bureau (ZPEB) and
    Jiangsu Oil Exploration Corporation (JOECO), both nominally

    under the control of Sinopec.  These companies are legacy
    upstream companies apparently still directed by Chinese
    provincial and local governments.  As China's domestic oil
    exploration opportunities have dried up, these bureaus have
    attempted to sell their expertise overseas.

    "Subdued Tones Point To Disaffection..."
    ----------

    ¶6. (C) EconOff spoke with Sinochem's XXXXXXXXXXXX and XXXXXXXXXXXX, a
    senior manager from Sinopec Services (protect), about the
    structure of Chinese petroleum companies in Ecuador.
    Regarding the structure of the Andes consortium, XXXXXXXXXXXX said
    that the 60-40 CNPC-Sinopec ownership structure leads to
    management tension and "long, fractious board meetings."
    Andes is by far China's most productive and lucrative
    operator with an output, at EnCana's previous production
    level, of approximately 200,000 barrels per day.  Andes'
    senior executive in Ecuador, Dr. Zhang Xing (reftel b), is a
    CNPC man; the Sinopec counterpart at his level, Dr. Duan
    Zhibin, lives in China and visits Ecuador only occasionally.
    His deputy, Ding Jingjun, is thus the highest-level Sinopec
    officer resident in Ecuador but not an equal partner to
    XXXXXXXXXXXX.  Sinochem's XXXXXXXXXXXX said that "the worst thing is for
    Chinese companies to work together.  Chinese and foreign
    companies can work together without problems, but Chinese
    companies together are not good."  XXXXXXXXXXXX said that Sinochem
    originally had planned to participate in the Andes consortium
    but pulled out.  He said that "Sinochem actually cares about
    making money", while CNPC and Sinopec do not.  This apparent
    disregard for profits by China's two majors echoes the
    sentiments of other industry contacts.  Both XXXXXXXXXXXX and XXXXXXXXXXXX
    confirmed that CNPC Amazon's work on Block 11 has been
    unproductive: "they keep drilling, but there's no oil coming
    out."

    ¶7. (C) According to Sinopec Service's XXXXXXXXXXXX, his company
    subcontracts with the old provincial service bureaus to
    perform technical services: "we receive money from our
    clients, and then we pay the subcontractors."  Sinopec
    Service's office in Quito thus appears mainly to be engaged
    in sales, business development and finance, with little
    in-house technical expertise permanently resident in Ecuador.
     EconOff asked how Sinopec Services chose which provincial
    service bureaus to employ, and XXXXXXXXXXXX replied that "the
    decisions are made back in China, depending on which service
    bureaus have relationships with Sinopec executives."
    According to XXXXXXXXXXXX, the service bureaus are not supposed to
    contract their services without passing through Sinopec or
    CNPC, but because of "poor management control in CNPC", CPEB
    managed to contract a perforation deal directly with American
    company City Oriente, its first foray into the private
    sector.  City Oriente's local manager told us that CPEB
    drilled nine wells in its Block 27, and City Oriente had
    plans to expand the cooperation to twenty-one wells before it
    had to scale back plans due to the passage of the
    Hydrocarbons Law.  The City Oriente manager said that
    although CPEB first started the work with shoddy equipment
    and low standards, they were "very compliant" in working with
    City Oriente to upgrade their rigs and safety standards.

    "Cooking Pots Over The Campfires..."
    ------------

    ¶8. (C) The profile of Chinese oil company staff in Ecuador is
    overwhelmingly male, on average between the ages of thirty
    and fifty years old.  Most of these workers seem to be
    married but leave their families back in China.  According to
    XXXXXXXXXXXX (protect), a XXXXXXXXXXXX manager of Sinopec
    Services, staff leave their families in China because Chinese
    educational options for their children in Ecuador are
    nonexistent.  Many of the staff live communally in
    apartments.  The companies bring their own Chinese chefs to
    Ecuador, and the staff often eat their meals together in the
    communal apartments.  In addition to raising the mean quality
    of Chinese food available in Ecuador, the influx of single,
    Chinese men into Quito has been a boon to Ecuador's nascent
    casino industry.  We are aware of one ex-finance manager from
    CPEB who embezzled several thousand dollars from the company
    to finance his gambling habit.

    Comment - Ecuador's "Entangling Ground"
    ------------

    ¶9. (C) The entrance en masse of Chinese oil companies into
    Ecuador is a potent manifestation of China's national
    strategy of securing direct oil contracts around the world to
    reduce China's reliance on oil shipped from and through
    hotspots such as the Persian Gulf and the Straits of Malacca.
     Sinochem's XXXXXXXXXXXX, echoing many industry analysts, questioned
    this strategy, recommending a greater emphasis on maximizing
    profits from sales to the world oil markets.  Nonetheless
    Chinese oil exploration activities are increasing in the
    region.  Sinopec's XXXXXXXXXXXX told EconOff that Chinese oil
    companies will soon announce a new consortium with India's
    ONGC-Videsh in Colombia.

    ¶10. (C) Global contracts for the Chinese majors' service arms
    also offers valuable opportunities to increase their
    technical and managerial expertise, and we assume that the
    dozens of Chinese petroleum engineers coming through Quito on
    temporary projects will take these lessons home, furthering
    China's effort to create an integrated oil services company
    to rival Western companies like Schlumberger and Halliburton
    (reftel c).

    ¶11. (C) Acquisitions of efficiently-managed and productive
    operations such as EnCana's therefore serve both strategic
    objectives at once, but Ecuador has proven a difficult and
    expensive training ground for China.  With the GOE's
    combination-punch of the Hydrocarbons Law and the Oxy
    contract caducity, the Chinese saw the value of their $1.4
    billion EnCana acquisition shaved by about seventy percent
    (reftel b).  Meanwhile CNPC reportedly faces periodic
    indigenous unrest around its heretofore unproductive Block
    ¶11.  Chinese petroleum managers and diplomats, who appear to
    consult closely on all major issues, openly complain about
    the corruption and difficulty of doing business in Ecuador,
    but we see no sign of a tactical retreat.  Indeed, if XXXXXXXXXXXX's
    pronouncement of a China-India joint-exploration venture in
    Colombia materializes, then that will be more evidence that,
    profits or losses, Chinese petroleros in South America are
    here to stay. End comment.
    JEWELL

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